The Organizational Impact of Mergers and Acquisitions on the Tourism Firm - Essay Example

The Organizational Impact of Mergers and Acquisitions on the Enlarged Tourism Firm The tourism sector, like many other sectors, has been actively involved in mergers and acquisitions as key players try to expand their businesses quickly by taking advantage of synergies that can be utilised as a result of cooperating with, or controlling other businesses. A competitive business environment which has seen a trend towards increasing price of aviation fuel has meant that businesses need to be really fit in order to achieve their growth targets. There has been a trend towards mergers and acquisitions in airlines and hotels as attempts are made to remain competitive. Mergers and acquisitions need to be carefully considered, well planned and executed with great care because, although a decision to have an enlarged firm can provide an opportunity for growth, a failed execution can be costly, resulting in others attempting to takeover or control a part of the business. A merger or an acquisition is followed by a period of uncertainty in the enlarged organization as change managers try to execute plans and transform a vision into reality. It is necessary to try and pay attention to the human resources in the enlarged organization along with trying to utilize economies of scale and synergies, because those who have been interacting with the previously separate organizations can feel insecure, angry and frustrated with the change. Thus mergers and acquisitions bring about a period of uncertainty and chaos as spectators as well as share markets decide if the business decisions that were made or their executions have been sound. This brief essay presents a discussion of the organizational impact of mergers and acquisitions on the enlarged tourism organization. Contents 1. Introduction 5 2. The Organizational Impact of Mergers and Acquisitions 7 3. Conclusion 12 References / Bibliography 14 List of Figures Value Creation and Integration in the Enlarged Firm 8 1. Introduction Mergers and acquisitions have been very popular in nearly all sectors of the economy in the past decade because corporations have felt that there is a need to utilize economies of scale and to take advantage of the strengths which have been developed in specific organizations to provide lower operating costs in order to thrive in competitive times (Andersson, 2000, Pp. 1 – 10). In the tourism sector, mergers and acquisitions have had an impact on hotel chains as well as airlines and an increasingly larger number of firms have tried to join hands in order to survive or thrive. Shocks such as the September 11 terrorist attacks as well as higher aviation fuel costs, have encouraged firms associated with the airline or hotel businesses to combine their strengths in order to become economically competitive. An example of a recent merger in the airline business is the Air France and KLM merger which resulted in the two culturally diverse organizations deciding to cooperate with each other in order to choose a quicker way to expand their business (Janik, 2004, Pp. 1 – 10). The Air France and KLM merger is but a single example of the large number of mergers which have been forced on the airline industry as a result of the increasing operating costs due to higher fuel prices. The higher cost of transporting tourists has also meant that the hotel and tourism sector had also been facing tougher competition and hotels have also tried to merge their operations in order to try and increase their profits. Hotel rooms that were not required by business travellers, who have been the most frequent users of airline and hotel services in the past, were mostly empty because the tourists have preferred to stay at home rather then pay more for their transportation and lodging (Virtual Information Pipeline, 2006, Pp. 1). Faced with the prospects of gaining fewer guests, there were many mergers and acquisitions in the hotel industry including Starwood acquiring Sheraton and Marriott, Bass purchasing Inter – Continental hotels to enhance its Holiday Inn holdings (Gold, 2001, Pp. 1). Previously, Doubletree Corp. and Promus Hotel Corp. had entered into a definitive merger agreement (Harrison, 2004, Pp. 5). Large hotel groups such as Accor SA have a long history of mergers and acquisitions (The Centre for Hospitality Research, Cornell, 2006, “Accor SA”). Some of the reasons that have been mentioned as being responsible for the decision to merge with or to acquire another business include taking advantage of the information that a company is undervalued, trying to achieve rapid growth, trying to match the strengths and weakness of two organizations in order to create a premium company, trying to satisfy market demand for additional products, trying to offset seasonal or cyclical fluctuations as well as downturns, increasing earnings per share, enhancing the power or prestige of an owner or CEO and trying to avoid risks associate with internal start-ups or expansion etc (Hall, 1987, “Table 2”). However, despite the best intentions associated with a merger or acquisition, the bringing together of two different business organizations has the capacity to unleash complex changes or processes in the expanded organization and unless the management of the expanded organization is very skilful about managing change, unexpected outcomes or even poor financial results can be the result of a merger or acquisition (Andersson, 2000, Pp. 121 – 130). It is, therefore, important to try and understand the merger and acquisition process and the changes which may occur as a result of the merger or acquisition. This brief essay attempts to explore the organizational impact of mergers and acquisitions on the enlarged firm with a particular reference to businesses in the tourism sector, such as airlines or hotels. The next section presents a discussion of the impact of mergers and acquisitions. 2. The Organizational Impact of Mergers and Acquisitions The basic motivation for merging with another firm or for a new acquisition is to somehow create a better or a premium valued company as being a part of the corporate growth strategy with advantages to be gained from a good fit of the two separate entities. There are many synergies which can be developed into an organization as a result of a merger or the acquisition of a new company. These include the following (Rock, 1990, Pp. 68 – 191) and (Andersson, 2000, Pp. 8 – 25): The lowering of the overall tax liability of the enlarged organization as a result of the use of excess funds to purchase shares in the business that has been acquired or with which a merger has been undertaken. The reduction of operating costs as a result of trying to utilise economies of scale or through the prevention of duplication of effort. Revenue enhancement through the combination of the products or services of the two companies or as a result of joint marketing, distribution or e-commerce operations. A capacity to acquire more funds through loans as a result of bigger size. Attempting to take advantage of the human capital synergy which may exist as a result of the joining together of the human resources of the two previously separate organizations. Such attempts may include reducing the overall size of the workforce while retaining the better employees, changing the way in which people work and what they are responsible for, as well as trying to minimise any liabilities associated with compensation. Attempts to try and create value through the integration of the assets of the two organizations. It is important to try and identify the most appropriate path for an integration of the two previously separate organizations in order to create the best possible value. Hence, the organizational managers who are involved with a merger or an acquisition or who are involved with the management of change following a merger or acquisition should be very astute and adapt at bringing together the two organizations as well as at identifying synergies. Uncertainty, fear of the unknown and insecurity within the corporate employees are the natural result of a change and the two organizations with diverse corporate cultures must adopt a new culture that is acceptable to both (Andersson, 2000, Pp. 8 – 24). Value Creation and Integration in the Enlarged Firm (Andersson, 2000, Pp. 15 and 19) The process of organizational change that is unleashed after a merger or an acquisition is both structural as well as unstructural. Structural change has to do with tangible features of a firm including technical issues, operating procedures and the utilisation of assets etc, while the unstructured change has to do with emotions and human reactions arising out of change. A process of unfreezing, transition and refreezing usually takes place in the enlarged organization as managers bring about new ways of working, new procedures, new corporate structure and new products etc. Managers will be weighing factors affecting a change before deciding on bringing about any change which was being considered and employees who are being affected may be required to be taken into confidence, consulted or reassured. A merger or an acquisition will certainly have been motivated by some sound objective or need that has to be fulfilled. However, after the merger or acquisition has been processed, managing humans and human emotions can be the greatest challenge for managers of the enlarged organization. Those who will be required to be managed are not just the employees, but also those who have been interacting with the two organizations including its customers, suppliers as well as associates. People will have to be motivated to work together and reciprocal organizational understanding will have to emerge. Capabilities have to be made available for transfer and there should be a capacity to receive any beneficial transfers between the firms. The integration period can be difficult and there can be a temporary loss in productivity, efficiency as well as the value of the enlarged organization, with the value being reflected in the price of shares etc. Thus, after a merger or an acquisition, managers must be able to make the right choices for integration and the best human resources should be motivated to function efficiently. Although mergers and acquisitions act as a means of developing a business faster, the success of a merger or an acquisition depends on how well managers have been able to fit together the two organizations into an enlarged organization. Without a decent enough job, the merger and acquisition will not produce the desired results and efforts to put the enlarged organization onto a path for rapid growth can backfire. About 60 % of all mergers and acquisitions fail to produce the intended results (Janik, 2004, Pp. 1 – 5). The success of a merger is usually measured in terms of any increase in the share price of the merged company, profit earnings ratios and managerial perceptions of what has been gained (Janik, 2004, Pp. 10 – 15). Return on capital employed is often a better measure of the success of an organization rather then the number of hotel rooms that are available or the number of aircrafts in a fleet. In the Air France – KLM merger, it was possible to utilise synergies associated with information technology systems, purchasing systems, fleet maintenance and overhaul as well as airport operations. Optimisation of dual route systems, flight schedules as well as coordination of fleet management was possible to be achieved and this is expected to provide savings of 495 million Euros at the end of the fifth year of combined operations. However, cultural differences between Air France and KLM had been feared as the element that could lead to the failure of this merger. Thus, prior to merging, a detailed framework for cooperation had been drawn up which attempted to protect both the Dutch and French interests within the enlarged organization. Human resource management and communication style can have an impact on the success or failure of the enlarged organization, especially when diverse cultural differences do exist. KLM had decided earlier not to cooperate with AlItalia, the Italian airline, because of cultural differences. For large companies, mergers are usually mergers of equals, but for the small to medium companies, a larger company usually acquires another company. A successful merger involves detailed planning, a study of the strengths and weaknesses of the firms being merged as well as risk analysis to be followed with on the spot decision making during the implementation of the merger. Quick decision making is often required because the opportunities can dissolve before rewards can be extracted and it is important for managers to have identified post merger or acquisition priorities. Because mergers and acquisitions involve uncertainty and change, therefore such activities can have their toll on the humans who have been caught up in change. Some people react with fear and denial, while others overcome difficulties and accept change. However, the enlarged organization may be required to indulge in expensive recruitment and retraining which can be draining for the organization. It has been observed that about 75 % of the senior executives of the enlarged organization may decide to leave within the first three years of a merger having taken place. The human resources, financial resources, physical resources and information resources of the enlarged company along with its products or services are likely to be in a state of flux after a merger until the situation can become more solid (Andersson, 2000, Chapter 2) and (Janik, 2004, Pp. 20 – 45). Because of the uncertainty associated with change, the share price of the enlarged organization may initially indicate a dip. However, this does not necessarily mean that it is not possible for analysts to accurately predict earnings, especially if the enlarged organization involves a merger or acquisition of firms that are similar. For firms which are dissimilar or operating in different industry segments, it becomes more difficult for analysts to predict the future (Canina, 2002, Pp. 9 – 10). However, in the hospitality industry, well thought out mergers or acquisitions can quickly translate into stock exchange successes. The stock exchange has a tendency of nearly always rewarding what is likely to be a success and that which will work better in the future (Harrison, 2004, Pp. 1 – 17). It is important to demonstrate that a deal has been done for the right reasons, with due diligence for the consequences of a merger and that the synergies have been properly combined with all things working well. It has to be understood that in many countries, mergers and acquisitions may have to be approved by the governments so that the public interest is protected as far as market monopolization or unfair competition is concerned. Hence, there are limits to what mergers are possible and how these can have an impact on the future of the enlarged tourism organization (Elkof, 2005, Pp. 5 – 30). Mergers and the formation of corporate alliances have consequences that extend far beyond the enlarged organization. In the tourism industry, integration of tour operators through mergers, acquisitions and takeovers, with the same processes being experienced by other related actors such as transporters or hoteliers, has had a tendency to limit the number of significant players with the result that there are far fewer key players or decision makers (Sorensen, 2005, Pp. 133) and (World Tourism Organization, 2002, Chapters 1 – 3). This is not necessarily in the public interest. Because of the uncertainty and change which is unleashed on the enlarged firm as a result of a merger or acquisition, at least when the changes have not been frozen, such exercises can be a mixed blessing for the shareholders (Murshed, 1997, Pp. 15 – 25). It may be necessary to place an emphasis on marketing in order to build a new image for the enlarged firm following a merger or acquisition. However, a lot of mergers do not catch the public eye because the merger or acquisition decision will not be made well known to the general public. The enlarged firm also has an opportunity to enhance its bargaining power over suppliers as a result of the pooling of the resources of the two merged firms. Hence, it can be said that the time period following a merger or an acquisition is a time for change and uncertainty. Well planned mergers and acquisitions that are managed by astute managers can bring about long term benefits. However, successful mergers and acquisitions need to be well planned and well thought out for success to be made possible, with the plans that have been made required to be implemented with diligence as well as care. The next section presents the conclusions that may be drawn from the previous discussion. 3. Conclusion It may be concluded that mergers and acquisitions do provide unique opportunities for enhanced growth. However, such opportunities need to be carefully studied and the merger or acquisition carefully planned and executed, because a large number of mergers do fail to achieve the desired results. The human factor needs to be carefully considered because human attitudes can malfunction and create problems. A carefully considered merger or acquisition can bring about growth and stability in the long term after the instability has died down. The share market and the public at large needs to be convinced about the soundness of a merger and the fact that the change has been managed well in order to continue to provide support for the enlarged firm. Bibliography / References 1. Andersson, Andreas and Karlsson, Brigitta. (2000). M & A and their Impact on the Organization. Gothenburg University Business School. Retrieved: May 27, 2006. From: http://www.handels.gu.se/epc/archive/00001895/01/Andersson_1999_24.pdf 2. Canina, Linda and Sinha, Parveen. (2002). The Impact of Mergers and Acquisitions on Earnings Predictability: An Examination of the Lodging Industry. Cornell University School of Hospitality. Retrieved: May 27, 2006. From: http://www.hotelschool.cornell.edu/chr/pdf/showpdf/chr/research/working/mergersacquisitions.pdf 3. Elkof, Anna. (2005). In the aftermath of the EC merger control reform -The relevance of efficiencies in merger assessments. University of Lund. Retrieved: May 28, 2006. From: http://www.jur.lu.se/Internet/Biblioteket/Examensarbeten.nsf/0/68656B24F41B638AC125713700402639/$File/exam.pdf?OpenElement 4. Faisal, Murshed. (1997). Resource Configuration and Value Creation Following Mergers and Acquisitions. Joseph M. Katz Graduate School of Business. Retrieved: May 27, 2006. From: http://etd.library.pitt.edu/ETD/available/etd-08022005-004500/unrestricted/FeisalDiss.pdf 5. Gold, Melvin. (2001). The good times come - but will they stay? PKF Consulting. Retrieved: May 27, 2006. From: http://www.pkf.co.uk/web/PKF800.nsf/pagesbyID/IDD04A7DD997B73A7880256B4B00584553?OpenDocument 6. Harrison, Jeffrey S and Liu, Zhaopping. (2004). Leveraging Mergers and Acquisitions. Cornell University School of Hospitality Research. Retrieved: May 27, 2006. From: http://www.hotelschool.cornell.edu/chr/pdf/showpdf/chr/research/working/Harrison-Liu-12-07-04.pdf?my_path_info=chr/research/working/Harrison-Liu-12-07-04.pdf 7. Hull, Peter D and Norburn, David. (1987). The Management Factor in Acquisition Performance. Cranfield School of Management. Retrieved: May 27, 2006. From: https://dspace.lib.cranfield.ac.uk/bitstream/1826/534/2/SWP1387.pdf 8. Janik, Katarzyna. (2004). Managing Cross – Cultural Mergers – The Role of Management Style, Case Air France – KLM. Bournemouth University. Retrieved: May 27, 2006. From: http://www.du.se/upload/6894/Janik%20thesis.pdf 9. Rock, Milton L and Rock, Robert H. (1990). Corporate Restructuring: A Guide to Creating the Premium Valued Company. McGraw Hill. 10. Sorensen, Flemming. (2004). Tourism Experience Innovation Networks. Roskilde University. Retrieved: May 28, 2006. From: http://www.ruc.dk/upload/application/pdf/f51d6748/CSS_Rapport_4.pdf 11. Spinetta, Jean – Cyril. (2006). Cross Border Mergers and Acquisitions: The Air France – KLM Story. Nyenrode European Business Forum. Retrieved: May 27, 2006. From: http://www.airfrance.com/double6/file/Y1/file_Y1.nsf/(Lookup)/en-DISCONyenrode/$file/nyenrode.pdf 12. The Center for Hospitality Research, Cornell University. (2006). Accor SA Case Study. The Center for Hospitality Research, Cornell University. Retrieved: May 28, 2006. From: http://www.hotelschool.cornell.edu/chr/pdf/showpdf/chr/research/casestudies/accor.pdf 13. Virtual Information Pipeline. (2006). Trends in Hotel Occupancy Rates. PKF Consulting. Retrieved: May 27, 2006. From: http://www.afe.org/vip/portal/index2.php?option=com_content&do_pdf=1&id=2236 14. World Tourism Organization. (2002). Tourism in the Age of Alliances, Mergers and Acquisitions. World Trade Organization. Retrieved: May 28, 2006. From: http://www.amazon.com/gp/product/9284405149/002-2853303-6626417?v=glance&n=283155 Read More